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1. The Financial Crisis to date has claimed several venerable names and may yet claim more Investment Banks.

2. The Investment Banking Industry in the Caribbean is extremely important:

- Contribution of Investment Banking Sector

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- Emp – (1000 – 2000)- Profits – USD 200MM- Raising Capital - USD 1.5 Billion- Funding Projects - USD 250MM

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3. It is therefore natural to enquire and to

examine whether or not the Investment

Banking Industry in the Caribbean is exposed

in the same way or will be susceptible to

contagion via transmission mechanisms.

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HYPOTHESISThe current Financial crisis stemmed from a

deterioration in credit quality (sub-prime Loans)

which was exacerbated by Liquidity crisis in US

Investment Banks (which typically fund their

assets with wholesale short-term Liabilities) but

which was further compounded by Mark-to-

Market (MTM) Accounting convention.

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CAUSES AND AMPLIFIERSA. Sub-prime Lending and the Lowering of

Credit StandardsB. LiquidityC. Mark to Market AccountingD. Excessive LeverageE. Exposure to DerivativesF. Off Balance Sheet FinancingG. Inability to access Federal Reserve

FundingH. Lack of on-site supervisionI. Credit Rating Agencies

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SUB-PRIME LENDING AND THE LOWERING OF CREDIT STANDARDS

In a nutshell, global liquidity from China and

other current-account surplus countries was

directed towards the US and UK which then

inflated asset markets (especially housing)

which was plagued by poor regulation and

dangerous incentives.

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By contrast, Caribbean Investment Banks have little or no exposure to US Sub-Prime Loans, very little exposure to mortgages generally and are currently exhibiting non-performing ratios of less than 2.5%.

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LIQUIDITY

US Investment Banks are particularly

vulnerable to credit-market turmoil, because

they rely on funding from wholesale markets,

much of it short-term including over-night

funding in repurchase markets. This 4.5 Trillion

Market became unstuck during the crisis.

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Caribbean Investment Banks, unlike their

US and UK counterparts raise their liquidity

via deposits. Furthermore, if they ever run

into difficulty, they can go to their parents

which are usually commercial banks. Due to

their lower reserve requirements they are

often more competitive than their retail and

commercial counterparts.

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LIQUIDITY RISK This situation is further compounded by

the fact that there is what I have described

as a liquidity trap whereby, due to poor

transmission mechanisms. (from local to

foreign currency) local liquidity is actually

trapped in the local financial system and

keeps “slushing around” moving to where

it attracts the highest internal rates.

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REGULATORY ARBITRAGE

Regulatory Arbitrage means that because the

range of investment opportunity is limited for

regional institutional investors even more

liquidity is trapped in the system.

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MARK TO MARKET ACCOUNTING AND THE PREPONDERANCE OF TRADING ASSETS OF THE BALANCE SHEETS OF INVESTMENT BANKS

Fair value accounting can cause a downward spiral in prices by encouraging institutions to sell assets quickly and

forcing them to take write-downs that do not reflect the “true” value of the underlying assets.

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In respect of Caribbean Investment Banks,

although MTM accounting is in effect, the

component of their balance sheet which is

affected by this convention is still

relatively small when compared to North

America Investments Banks.

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EXCESSIVE LEVERAGEUS Investment Bank were allowed to leverage

their Balance Sheet to levels unheard of in the Caribbean.

The Leverage ratio of Bear Stearns rose from 26 Times (assets were 26 times equity) in 2005 to almost 30 times at the time of its collapse in 2008.

Under the FIA Trinidadian Merchant Banks are limited to 12 times their capital

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EXPOSURE TO DERIVATIVESAccording to the Economist Magazine (May 7,

2008) approximately half of the write-down of

banks was due to the exposure to derivatives

which contained synthetic exposures to sub-

prime assets (CDO’s) and credit default swaps. In the case of Caribbean Investment Bank,

this exposure is almost non-existent.

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OFF BALANCE SHEET FINANCING AND EXPOSURE TO SIV’SUS Investment Banks accounting under US

GAPP, typically allowed for SIV’s which are akin

to a “shadow banking system” in which short-

term funding was raised (at lower interest

rates) and later invested in long-term higher

yielding assets.

Quite often these structures were not

consolidated

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and therefore provided a false sense of security in

terms of the bank’s capital adequacy ratio. Citi had

more than 83 Billion in SIV’s in September 2008.

Caribbean Investment Banks typically use IFRS. In

this regard, IAS 39 and SIC 12 would require these

enterprises to consolidate any “SIV” or SPV once they

retained an economic interest in the enterprise.

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INABILITY TO ACCESS (IMMEDIATELY AVAILABLE) EMERGENCY FINANCING FROM THE FEDERAL RESERVE Because US Investment Banks did not come

under the jurisdiction of the Federal Reserve they

did not have access to Federal Financing.

Investment/Merchant Banks in the Caribbean are

regulated by the Central Bank and by virtue of

this, have access to Central Bank Financing via

the repurchase market

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REGULAR BANK SUPERVISIONBecause regional banks fall under the

supervision of the Central Bank, they are

subject to regular on-site inspections by the

regulators.

US Investment Banks were not subject to such

routine regulation which would have alerted

the authorities to the impeding danger.

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THE ROLE OF CREDIT RATING AGENCIES The legitimacy and stamp of approval of Credit

Rating Agencies undoubtedly contributed to the

crisis.

As these assets began defaulting the Credit Rating

Agencies downgraded these assets further

exacerbating the situation on account of the MTM

accounting convention thereby forcing further sales.

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In the case of Caribbean Investment Banks and

Institutional Investors Credit Rating Agencies

played and plays no such role. Indeed, Pension

Funds are mandated as to what investments

they can invest in statutorily so that you do not

have this vicious cycle and therefore no

compulsion to sell.

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CARIBBEAN INVESTMENT BANKING MODEL Regional Projects Requiring Financing Up

to USD 250 MM

Non-Investment Grade Projects

Projects with a pay-back period of 10-20 years

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Basic Infrastructure financing (Toll Roads, Airports, Seaports, Hydro-plads)

Local Private Placement Issues

144 A Issues

REG: S. Issues

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PROFILE OF INVESTORS

LOCAL INSTITUTIONAL INVESTORS

LOCAL BANKS

US INSTITUTIONAL INVESTORS

CENTRAL AMERICAN INSTITUTIONAL INVESTORS

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CARIBBEAN INSTITUTIONAL INVESTORS

HNW INDIVIDUALS

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WHITER GOES CARIBBEAN INVESTMENT BANKING Notwithstanding The remotest of nexus.

To Its US and European Counterparts The Investment Banking Industry In The Caribbean Is At A Critical Juncture

CLICO / CIB Bailout (US 1-2 BN)- Not Related to US Financial Crisis- Related Party Lending- High Cost Resource Mobilisation Strategy

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Collapse Of Stanford Banking Group

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THE MULTINATIONALISATION OF

THE REGIONAL BANKING SECTOR

In the recent past several highly

profitable indigenous financial

organisations have been targeted by

Foreign Banks. At least one has been

taken over.

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Invariably, the purchasers of these bank tend to

be much more “risk averse” than their

predecessors with a propensity for “white good”

financing. This is done to the detriment of

Development Financing.

Quite simply they gravitate towards Retail

Banking and tend not to be developmental or

transformative in their approach to financing.

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INABILITY/RESTRICTION ON SELLING SECURITIES TO US INSTITUTIONAL INVESTORS Due to the meltdown in the US, due

to the imposition of new and “higher “

standards US Institutional Investors

are now less likely to purchase

regional securities. (Approximately

USD 150-200MM in regional

securities were being sold into the US

before the crisis.

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REGULATORY OVER REACH

Having seen finance wreck havoc, the

temptation would be to bind it in a regulation.

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THANK YOU.

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